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World demand for limited U.S. cotton supplies insatiable

World demand for limited U.S. cotton supplies insatiable

Record cotton prices and hungry world textile mills entwined in a “phenomenal“ buying frenzy resulted in the sale of about 1 million bales of U.S. cotton in less than a week. 80 percent U.S. upland already sold. 85 percent of U.S. Pima sold to mills. With most of the U.S crop sold, the market is expected to remain price strong for growers for at least a year.

Record cotton prices and cotton-hungry world textile mills entwined in a “phenomenal“ buying frenzy resulted in the sale of about 1 million bales of U.S. cotton in less than a week.

Ernie Schroeder Jr., CEO of Jess Smith and Sons, Bakersfield, Calif., said the buying and selling fury took place when about 500 people gathered in Southern California in early November at the biennial Sourcing USA Summit.

Sponsored by Cotton Council International, Cotton Incorporated and USDA Foreign Ag Service (FAS), Schroeder said he has never seen the marketing activity at the event like this year.

“You could not even sit down with one buyer without another competing for your attention. If you put out an offer to sell cotton, you had better have the cotton,” he said.

Schroeder’s company, the largest family-owned cotton merchandising company in the U.S, was one of about 20 export sponsors at this year’s summit where it was obvious that world cotton consumption has exceeded the available cotton supply.

Schroeder and the staff at Jess Smith and Sons got a pre-summit preview of what was to come when they hosted about 30 of the mill buyers for a tour of the San Joaquin Valley a week before the Southern California gathering.

“Everyone on the tour was really in good spirits,” he said, despite the current record cotton prices of more than $1 per pound for upland and well over $2 for American Pima.

“Yarn prices are good right now, and a lot of buyers of U.S. cotton are doing well. They were buying cotton like it was 70-cents per pound. There is simply not enough production and supply to meet current cotton consumption. That is a good problem to have for U.S. cotton.”

The majority of this year’s U.S. crop is sold. “Right now everyone has a little bit of cotton left, but because the harvest is still going, you do not know exactly what is left and you do not want to sell what you may not get,” he said.

Schroeder believes cotton buyers find it difficult to rectify the fact that USDA says there are statistically many unsold bales left, yet there is not much U.S. cotton for sale.

“Exporters like us have verbal commitments from our buyers for the cotton that has statistically not been sold. It is not uncommon for a mill buyer to ask you to reserve 500 bales of cotton to be sold at a price agreed upon later,” said the company CEO.

Short supply not going away soon

Schroeder believes 80 percent of this year’s U.S. crop has been sold before the final bale has been ginned. “Mill buyers want to get it before it is gone.” He said the shortage of supply to meet demand is not going away soon. Buyers who missed out on the 2010 crop are already contracting for 2011 cotton at attractive prices.

“The sourcing summit was amazing in the amount of cotton that was sold in a very short time period,” he added.

The young merchant could not speculate on what is the average price of bales already sold. However, he noted that last spring cotton marketing analysts were calling for growers to hedge their upland crop at the 75- to 80-cent level. “I believe a lot of growers sold their crop then. No one saw the price levels reaching the $1.50 level they have recently.”

Shortly after the summit, upland prices plummeted 30 cents a pound in a week on economy-cooling news out of China. “It had nothing to do with cotton. It was about China trying to slow down its economy a little bit and curb inflation.” China is the biggest buyer of U.S. cotton and any economic news out of there has an impact on the cotton market.

“I think it is only temporary. It is part of the volatility that is in the market right now,” he explained.

With most of the U.S crop sold, Schroeder expects the market to remain price strong for growers for at least a year.

“I do not see the supply and demand balanced for next year either.”

Schroeder says 15 percent of the Extra Long Staple 2011 Pima cotton grown primarily In California has already been sold. “We will be out of 2010 Pima by March or April this year,” he speculated.

With prices expected to remain strong for all 2011 U.S. cotton, it would be safe to assume a sharp increase in cotton acreage. Schroeder does not necessarily believe that. Schroeder has a good overview of the U.S. Cotton Belt with Jess Smith and Sons offices in Inverness, Miss.; Memphis, Tenn.; Deming, N.M.; and Marana, Ariz.

Double crop soybeans and wheat in the Mid-South look very strong for next year and growers may not opt to add many new cotton acres in 2011. Corn may be another attractive alternative. Texas, he said, will be wall-to-wall cotton in 2011. “Texas has a phenomenal crop this year. Can they do it two years in a row? Who knows what the weather will be there next season?”

California, Arizona have more cotton space

Schroeder believes the only states where there is room for substantially more cotton are California and Arizona. However, it may not be all that big because cotton ground has been taken over by trees and vines in California. Wheat also looks promising for 2011 in the West. If there is a crop switch, it will be from tomatoes and alfalfa to cotton.

Also, Arizona had a sharp increase in acreage in 2010, and there may not be that much more new cotton ground available in 2011. “The dairy industry and alfalfa are bigger than they used to be in the past in Arizona.”

It all depends on the weather as to what 2011 will hold, but Schroeder said he does not see supplies increasing dramatically more than they were this season. There likely will be little or no carryover from 2010 to 2011.

California acreage could take a sharp jump from 300,000 this year to maybe 450,000 or possibly even 500,000 for 2011. This would be high yield cotton, producing double the Beltwide average yield per acre.

This major boost in acreage may be tempered by available planting seed supplies. “I hear they are having problems with cotton seed this year,” said Schroeder. Late season rains on seed producing fields can have a dramatic affect on seed quality.

Assuming that a sharp California acreage increase would benefit Pima may not be correct. The 2010 season was a rough year for Pima yields.

Farmers have long memories and 2010 was a year not soon forgotten.

Pima is a longer season cotton and rains can dramatically downgrade quality. It also mandates second picking. Pima acreage will not likely go down. It just may not increase as much as prices would indicate. Pima also does not yield as well as Acala in many areas of the valley.

Upland varieties are shorter season, thus growers normally avoid rain and fog at harvest with earlier picking. Most are picked only once. Growers can also hedge upland when the Futures trigger a profit. The biggest percentage jump in cotton acreage may be with Acalas and uplands in 2011.

“It was a rough year for Pima growers. It was a horrible planting season, and it turned out to be an expensive growing season,” he said. Yields are down significantly. However, most of the crop was harvested before a series of cold fronts dumped heavy rain on the valley just before Thanksgiving.

He said the final bale count for U.S. Pima will be less than the 450,000 USDA is projecting.

Growers knew yields would be down due to the late start. Nonetheless, many growers were surprised at what they did gather. Strong Pima prices took some of the sting out of the lower yields.

“Quality so far for Pima is good. Overall, this year could have been a lot worse for Pima. We dodged a bullet,” Schroeder said.

Upland and Acala yields were average.

The large group of mill cotton buyers Jess Smith and Sons hosted in the valley got a first-hand look at what growers were facing. A cotton field tour was cancelled due to bad weather.

Later the buyers and growers met for dinner.

“It was a great opportunity for our mill customers to meet growers and talk to each other about growing and processing cotton,” Schroeder said.

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